529 Plans: Quick Facts to Know

While there are various ways to go about saving for college, 529 plans remain a very popular choice due to their numerous tax and saving advantages. Setting one up is relatively simple but understanding some of the mechanics of a 529 can get a bit complicated. Below are several facts about 529 plans that can help you navigate across this area:

529 plan’s impact on financial aid

When filling out the FAFSA (more info on the FAFSA can be found in an earlier blog here), a portion of 529 assets are factored in when calculating how much financial aid one can receive. Based on how financial aid is calculated, 20% of assets held in the student’s name are factored in while only 5.64% of assets held in the parent’s name are counted. Thankfully, 529 plans are counted as a parental asset. Otherwise, this would result in potentially less financial aid if a 529 plan was considered as a student asset.

Income limits to contribute

Unlike Coverdell ESAs (Educational Savings’ Accounts) where you may not be eligible to make contributions after crossing a certain income threshold, 529 plans have no income limitations for eligibility to make contributions.

State tax deductions for contributions

While there are no federal tax deductions for contributions made into a 529 plan, some states do allow deductions of contributions on the state tax return, up to certain limits. For example, PA and NY are two states that offer deductions.

In PA, one can deduct on their PA tax return up to $15,000/beneficiary (or $30,000/beneficiary if married filing jointly) of contributions made to a 529.

In NY, one can deduct on their NY tax return up to $5,000 (or $10,000 if married filing jointly) of contributions made to a 529.

In-state 529 plans

While each state has a 529 plan, one would assume that they would have to open a 529 plan in the state in which they reside. However, this is not true. One is not limited to opening a 529 plan based on where they reside and can open an out-of-state 529 plan. It may pay to shop around as some states may offer better plans. (Though you should strongly consider an in-state plan if you are eligible for a state tax deduction.)

Paying off loans with 529 plans

Thanks to the recently passed SECURE Act, a maximum of $10,000 of 529 assets can be used to pay down federal student loans and most private loans, without any penalties or tax consequences.

529 plans for international education

529 plans can be used for qualifying educational expense if a student intends to study abroad. The US Department of Education provides a comprehensive list of schools that be funded through 529 assets. The list can be found here.

Leftover funds in a 529

If a student earns a scholarship or if a 529 was overfunded, one can find that there may be an unused balance in the plan. The next question one would ask is “What to do with the remaining balance?”. Thankfully, 529 plans are not a “use it or lose it” type of account. There are a few ways to distribute the funds without facing penalty or tax consequences. Our earlier blog here goes over what your options are if faced with this situation.

Conclusion

Ultimately, 529 plans are a great savings option for education planning. While there are various little details that one should consider such as the ones mentioned above, it can help to seek out a fee-only financial advisor to consider every angle.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.